Analysis of Krafts Takeover of Cadbury

synopsis of kraft papers putsch of CadburyOverview Of Both CompaniesCadburys origins date back to almost two centuries when it was founded by John Cadbury who started the backup by selling hot chocolate and tea in Birmingham, UK. Later he expanded by starting a row of beverages after a nuclear fusion reaction with Indian Schweppes changing the comp whatsoever build to Cadbury Schweppes (Chinn 1998). Successful product developments and launches have enabled Cadbury to boast of an extensive confectionary line consisting of umber Essence, Easter Eggs,Milk Chocolate, Cadbury Fingers, Dairy Milk, BournevilleChocolate, Milk Tray, Flake Creme Egg, Crunchie, Picnic, Curly windy, Wispa boost, Twirl and sentence Out (Cadbury 2010). kraft, on the some other hand, is a US company roughly a century old, which started off as a approach to door cheese business only expanded into other confectionary items through legion(predicate) coups previously much(prenominal)(prenominal) as Ritz C rackers, Nabisco (Oreos) and Phenix Cheese Corporation (Philadelphia Cheese) to achieve succeeder (Smith 2009). It is second in terms of sales and popularity in the confectionary industry with yearbook r pointues of $42 jillion, operating in more than 150 countries (Kraft 2008).The Idea Of A TakeoerDue to recessionary times fol minoring fall in sales, many companies in the confectionary industry recognized the potential of merging with their competitors to run competitive and enjoy economies of scale (Mauboussin, 2010). Cadbury had continued to be a potent performer in the confectionary industry and shown steady carrying out and growth in light of the turbulent economic times. Much of Cadburys growth was referable to its front line in emerging global marketplaces. Kraft was attracted to Cadbury due its blind drunk performance during the economic crisis. This led to Krafts proposal to Cadbury of a coup detat.The initial religious offering of $16.3 billion or 740pence per sh ar by Kraft to Cadbury was outright rejected as derisory and an attempt by Kraft to take over Cadbury for cheap. Cadbury has had strong brands whose icons argon etched in the minds all over the world, an impressive class line and extensive worldwide consumer base. Successful financial overview and steady business model reinforced Cadburys belief that it should be an independent company. Krafts playing period did non come remotely close to reflecting the companys true worth.Kraft proposed another arouse shortly This comprised of an offer of 10.1 billion ($17 billion, same terms as the first bid in September-300 pence in cash and 0.2589 Kraft voices per Cadbury sh ares. The finale expense of 9th November reflected the bid valuation of Cadbury at 710 pence which was lower than the share price of 761p on that day.Krafts share price $26.53 Ex channelise rate (as agreed) $1.66 / GBP. Ratio 0.2589 Kraft shares per e precise Cadbury share (26.53/1.66 * 0.2589 = 4.133 + 4.13 = 7. 13).This was slight than the price of Cadbury on that day and even the initial level of 7.45.Cadbury rejected the offer on the basis of under look upond Cadbury which was right off of a lesser value. It was in fact even lower than the new Cadbury share price.The Cadbury chairman saidUnder your proposal, Cadbury would be absorbed into Krafts low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure play confectionery company.The hype make upd by rumors of coup detat figures led to exciting speculations .Media reported Ferrero to be considering a rival bid. Hersheys affirm its own interest for same purpose. There were not only speculations of a joint bid barely likewise of Kohlberg Kravis Roberts Co. joining the bidding race. only this favored Cadbury whose share price witnessed new highs. Hersheys and Ferrero would struggle to bid unaccompanied and only their feature offer could beat Krafts offer.On January 18, Kraft in the end managed to take over one of the worlds second largest confectionery manufacturer in a hostile bid of an enormous 11.5billion (US$19.5billion). This deal will be remembered in history as one of the largest transnational deals, oddly in the aftermath of credit crunch. After four months of continuous resi military capability, Cadbury shareholders agreed to Krafts offering of $19.5 billion, (840 pence per share). This was agreed upon with the spirit of creating the worlds largest confectioner. This consisted of 500 pence in cash per share and the stay amount paid to Cadbury shareholder in the form of Kraft shares. The shareholders had the forcefulness to decide the mix of amount they wanted in cash and shares. harmonise to estimations, the finals offer presented a multiple of 13 times Cadburys earnings in 2009 (after interest, taxes and debt were paid).The high bid price overruled the threat of Hersheys or Unilever offering a price for the same strategy, that is take over. The only rival left was near which too was reduced prodigiously when Cadburys Director signed the agreement that if Cadbury were to change its mind about the takeover, it would pay a handsome penalty for it, thusly such a situation arising became highly un bidly. The Kraft management, led by Irene Rosenfeld also assured that Kraft had a great respect for Cadburys brands, employees and reputable history and therefore the employees of Cadbury would do well in the new environment. Also, she verbally assured that under the new agreement the previous contractual rights of the employees would carry on the same as before.Market Structure Of The Two CompaniesCadbury and Kraft are twain multinational operations with activities in some(prenominal) developed and underdeveloped countries. Cadbury is however the market leader in UK and Irelands confectionary where consumers have a proclivity for British chocolate containing vegetable oil having a richer taste in milk and also sweeter as opposed to continental chocolate having cocoa fat content hence Kraft has a low share in such markets.Also, Cadburys strong standing in the Indian (Schweppes) and uniting American Markets was cleverly identified by Kraft who wanted to splash it and exploit under its own name at one time to add to its conquest story.Advantages Of The Takeover For Kraft.It was the biggest cross-b orderliness acquisition this year. Such a deal clearly pushed Kraft as number 1 dealer in confectionary. A merger allowed Kraft to gain a footing in the fast ontogenesis chewing gum category.Kraft management believes that the combination of the two companies is both a strategic as well as complimentary fit, vaunt a portfolio of over 40 confectionary brands each having the ability to yield annual sales of over $100 meg.A combination of Kraft products like Toblerone, Oreos and Ritz crackers with Trident gum and Dairy Milk chocolates from Cadbury would resolving power in $625 million annual p retax cost savings on annual company cost of research and development, advertising, branding and procurement. There would also be a significant level of revenue synergy ($50 billion annually) that would subsequently result in higher earnings per share. After the takeover, Kraft would have a greater ability to compete with the giant Nestle on confectionary campaign by increasing its market share in Britain and enjoying the benefits of Cadburys strong geographical networking in Asia.Krafts growth prospects would brighten through access to new brands specially in the confectionary department along with new distribution channels for the breathing products which are outside US. These constitute about one third of the market in developing countries such as Africa, China and India.Advantages Of The Takeover For CadburyCadbury would profits from Krafts extensive distribution network around the globe. Cadbury had been vulnerable to a takeover ever since it demerged its US soft drinks bu siness. This high takeover bid was an photogenic opportunity to do outside(a) with such a fear. A combined Kraft and Cadbury would significantly expand the global reach of both businesses and create synergies worth in the region of $625m. Since a stand-alone Cadbury had limited opportunities for value creation, agreement to the contract for takeover seemed like a wise decision.Disadvantages Of The TakeoverAlong with the obvious benefits come the many challenges and ethical issues. These are mainly high debt issues and employee layoffs. The high debt position of Kraft has further worsened with the takeover as funds were borrowed to pay the Cadbury shareholders a higher yield. Kraft also sold off its frozen Pizza line in order to make the takeover happen.The unions are worried that the jobs of hundreds would be at lay on the line (estimated 9000plus) as Kraft would try to reduce costs to operate expeditiously and pay back its debts. The company has also not given any formal assura nce that it would protect 4500 UK jobs. Also it is a known fact that when a company needs to cut costs, jobs and job conditions suffer.The British politics also opposes takeovers of British companies by foreign giants as it nearly unendingly leads to job losses. This takeover too was met with resistance including Gordon Browns advice and insistence against its happening but the shareholders overruled it and still went ahead with the deal. According to a Union head, This is a genuinely sad day for U.K. manufacturing. A successful, iconic, independent U.K. brand will now be owned by a giant company with considerable debt.In the face of such a scenario, even if employees are set(p) off it will not affect those who are rich and/ or are major shareholders in the company. For example, if the chairman, Roger Carr gets axed, he would still walk away with $30 million This proves that it is the low level managers and employees who feel the vulnerability of such an action. According to Dav id Bailey, professor at Coventry University Business School honest questions need to be asked about Krafts intentions Kraft already has a continue record of cutting production and moving production abroad Theres no guarantee that theyll keep production in the UK in the long run.When employees of both companies were interviewed to ask about their view points, most expressed fear and uncertainty. They were foul to the idea of such a large company where their positions and titles might be reduced or lost due to the massive structure. They are also despondent of their lack of involvement in this decision. According to one employee, nil really knows what is going to happen, but it is definitely not going to be pleasant.A disadvantage for Krafts shareholders of the takeover is that they now mentally feel less financially strong as assets were being sold and the entire pizza pie production plant worth $3.7 billion was sold to raise bullion for the takeover.The Market Theories Being P racticedThe Market theory witnessed in such a situation is a combination of globalization practiced over countries and between countries of the two companies having their origins in US and UK. The practice generated by Kraft, in this case, was that of a hostile takeover, where the big company used its aggressive stance on growth to acquire a smaller company. This is a very certain way to achieve company growth. In the event of a significant bid for shares, the shareholders are likely accept the offer but the board of directors more likely to resist. This is exactly what happened with this takeover too, however due to low bid price initially, the shareholders were not inclined towards the idea until the bid became impossible to resist.Some Kraft shareholders too were also strongly against this idea, especially Warren Buffett who felt that Kraft was overpaying Cadbury when there was no need for Cadburys products in Krafts portfolio for long term growth. He expressed his desire of wish ing to period the takeover if he could.ConclusionObjectively speaking, when takeovers of such a character occurs Two large companies come under one brand name, with the larger one burdened with high debt, the risk of business coming vote down due to conflicts in operation strategies in the near future are highly likely to occur. These are not realized when the benefits of the takeover are being discussed and third parties involved in its happenings are proactive as they too are making money. These parties are usually the deal makers, lawyers and other advisers who earn their commissions irrespective of whether the deal is eventually a success or a failure.ReferencingChinn, C. The Cadbury story a short history (1998). Brewin Books.Shwartz, S.,(2005).HosTorScience Fiction, reprint, Tom Doherty AssociatesFaulkner, D., (2002)Strategy, Taylor and FrancisGriffin, R.,(2009)Management,5,Houghton MifflinSlater, R., (1999), illustrated, beard Books.Hasian, Jr, 2008, Journal of Communicatio n Inquiry, 32,249-270www.kraftfoodscompany.comwww.cadbury.co.ukwww.unitetheunion.comwww.ft.comwww.cnn.com/2010/BUSINSmith, A.F., Eating History Thirty Turning Points in the Making of American Cuisine. (2009) Columbia University Press, 286-92.Maboussin, M. J. Surge in the Urge to Merge. (2010). Legg mason Capital Management.